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How the U.S. trade gap hurts the economy

(MoneyWatch) Although exports by American companies to China reached record levels last year, the U.S. trade deficit with the People's Republic is on track to top last year's all-time high of $295.5 billion. What gives?

Simple: The amount of goods and services China ships abroad still far surpasses its imports. Although U.S. exports to China grew more than fivefold over the last decade or so, Chinese exports to the U.S. nearly quadrupled. In short, our trade gap is growing, and not only with China (see table at bottom for a list of the top U.S. imports from China).

The global U.S. trade deficit rose in March at its fastest clip in 10 months, as sales of consumer goods coming from overseas outstripped gains in U.S. exports, according to new Commerce Department data. Despite Europe's financial woes, imports from the region jumped nearly 23 percent in March and hit a new high of roughly $35 billion. Since the U.S. economy officially started recovering in 2009, the trade deficit has doubled, notes economist Peter Morici.

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It's worth noting that many of those clothes, electronic gadgets, and other low-priced products coming into the U.S. from China and elsewhere are, in fact, goods made overseas by American companies. In theory, that should drive job-creation here in the states. The lower the price of, say, a Chinese-made flat-screen TV, the more units American consumers will buy. Rising demand for nice TVs is supposed to boost hiring, as U.S. companies gear up to fill orders.

If only theory jibed better with reality. With the U.S. economy still showing symptoms of depression, demand has yet to fully rebound. Hiring remains slow.

As the trade deficit has grown, meanwhile, U.S. businesses have moved a lot more jobs abroad in recent years than they've created at home. Between 1999 and 2008 U.S. multinationals slashed their domestic workforce by 1.9 million, while increasing overseas employment by 2.4 million, economist Martin Sullivan has shown. And it's not only about wages. The U.S. has lost more manufacturing jobs since 2000 than several countries that pay their workers more, including Australia, France, Germany, and Sweden. Nor is it only about manufacturing. The number of financial services, IT, HR, and other white-collar jobs lost to offshoring has risen since the financial crisis.

How does offshoring relate to America's growing trade deficit? Both stifle job-creation, which in turn is affected by U.S. trade policy. Since 2001, for example, the U.S. trade gap with China has resulted in a loss of 2.8 million jobs, according to the Economic Policy Institute, a Washington think-tank. More broadly, a widening deficit can act as a drag on the economy by muting the job-creating effects of consumer spending. Why? Because when people hit their local mall or big-box retailer, what they buy is mostly made abroad.

That creates more jobs overseas than it does here. It also weakens the impact of government stimulus by reducing the "multiplier" effect you get when formerly unemployed workers in the U.S. suddenly have a job and money in their pockets. (Again, the idea there is that higher consumer spending drives hiring, which continues the virtuous circle by pushing up spending.)

Is there a way to shrink the trade deficit? Yes, but not an easy one. It will require a shift in U.S. trade policy to encourage hiring at home and to promote exports. For its part, China must let the value of its currency appreciate and foster domestic personal consumption by allowing wages to rise. Such fundamental changes, subject as usual to the complex politics and power relations that govern global trade flows, remain as uncertain as ever.

US-China Business Council